Posts Tagged ‘institutional development’

This is a very thoughtful little essay from Yu Keping, dean of the school of government at Beida. It is hard to see how the Chinese government’s praxis could be out of line with such clear thinking. And yet it is. ‘Democracy’ remains one of hundreds of terms that you cannot search for on the Chinese Internet.

To say “democracy is a good thing” means that democracy can benefit the people. Yet if democracy is to benefit the people, a precondition is that social order must be maintained and hardship shouldn’t burden them. If democracy causes unrest, the people will lose hope, corruption will go unchecked. Under these circumstances, who would still wish for democracy?

Those who are against democracy often use this possibility to frighten their audience. The truth is that there is much evidence to show that the advancement of democracy will not necessarily produce disorder. Just the opposite: over the long term, it is only democracy and the rule of law that will provide for the long-lasting peaceful rule of the nation.

Direction

The China dream is about supporting the great revival of the Chinese nation. This revival includes many things, but a high level of democracy and the rule of law are an indispensable part of the vision.

The movement towards democracy everywhere is a political trend that cannot be reversed. China is no exception. Sun Yat-sen once said:

Worldwide trends are powerful. Going with them will bring success, going against them will bring disaster.

The main global trend he referred to was nations becoming independent, countries growing wealthy and strong, and their people wanting democracy. Today, when we speak of political civilisation, we mainly refer to democracy and the rule of law.

Democracy is the lifeblood of our republic. The central meaning of “The People’s Republic of China” is that the people are the masters and make the key decisions. The 16th Party Congress emphasised that intra-party democracy is the lifeblood of the party; the 17th Party Congressemphasised that the people’s democracy is the lifeblood of socialism. It is no longer a matter of whether or not one likes democracy: democracy is a trend that cannot be blocked.

The political development of socialism with Chinese characteristics is in fact the organic unification of three things:

… the leadership of the party, the role of the people as masters and decision makers; and the ruling of the nation in accordance with the law.

The sovereign people are at the heart of these three components. The goal is to enable “the people to be the masters”. In the final analysis, the “leadership of the party” and “the rule of law” serve to ensure that the people are the masters.

The 18th Party Congress emphasised the same point: the people must indeed remain the masters. The continual advancement of democracy and the rule of law is the historical responsibility of those in the Communist Party. This is our correct direction.

Timing

The delay of political democratic reforms in China will breed a host of problems. If there are no breakthroughs in the reform of key policy areas, then illegal corruption may turn into legitimised special privileges.

The achievement of democracy depends on real-world conditions. It needs to be linked to economic and cultural realities and the actual foundations of society. As we discovered when “running towards communism”, rushing ourselves will not work; it will bring disastrous consequences.

But moving too slowly in matters of democratic political reform will also not work; the problem of corruption that we hate to the bone won’t be solved. The fact that corruption, until this day, hasn’t been effectively controlled is linked directly to the slow pace of reforms, as are such dilemmas as publishing the property holdings of officials and dealing with declining public trust in government.

Identifying the proper timing of political reforms is the responsibility of politicians, who need to have great wisdom and be willing to take action. Of these qualities, willingness to take action and a sense of responsibility are most important.

Handing over a weighty responsibility: Hu Jintao congratulates his newly elected successor as president, Xi Jinping, in 2013. Reuters/China Daily

Route

To deal with its problems, China, as a great power, must draw up a clear roadmap for political reforms.

I have always believed there are three routes from which to choose: the first is a transition from intra-party democracy to social democracy. The 16th, 17th and 18th Party Congresses have consistently emphasised this point. Democratic development needs to choose a pathway that is most efficient and exacts the lowest toll.

The second pathway is a transfer from grassroots democracy to upper-level democracy. Grassroots democracy is directly aimed at the common people, to bring them direct benefits.

We (in China) have high levels of trust in the central government, but our trust in base-level government tends to be lower. “If the base level is not solid, the ground will shake and the mountains will sway.” We need to pay attention to this possibility.

The third pathway involves a shift towards greater political competition. Democracy requires competition: without competition, how are we to elect the most outstanding individuals?

Our democracy will naturally be one with Chinese characteristics. But democracy cannot be separated from elections and competition. Consultative democracy is very important, but consultation should not exclude elections.

Methods

Democratic development in China requires achieving a balance among six policy areas:

1 We want democracy and we also want the rule of law. Democracy and the rule of law are two sides of the same coin. Any politician who speaks of democracy cannot avoid discussing the rule of law, looking to the experience of the West, or to the experience of our nation, China.

2 We want deliberation and we also want elections. Chinese democracy, to a great degree, is in fact deliberative in nature; deliberation is part of our historical traditions. Elections, on the other hand, are the product of the modern world. Democracy is naturally inseparable from elections: the two need to be combined.

3) We want freedom and we want equality. These are basic values of democratic governance. In the past, we have over-emphasised equality. Since the reforms began, freedom has been emphasised, to the point where equality and liberty are in great tension.

4) We want efficiency and we want justice. These are two indispensable basic values. In the early stages of the reforms, the issue of efficiency was more salient, but now the issue of justice becomes central.

5) We want participation and we want order. Political scientist Samuel Huntington once said that the greatest challenge for political modernisation is to manage the relationship between public participation and political stability. As the interests of different social groups become more diverse, the desire of citizens for participation becomes more intense by the day. We need more open channels for political participation. Without legal channels, citizens will certainly resort to irregular, or even illegal channels, and social unrest will result. Democratic participation then becomes problematic.

6) We want a balance between individual rights and public rights. Rights belong to the individual, and the legal rights of citizens are guaranteed by the constitution. But we also need public rights, because our nation and society are a community.

China is facing many reform challenges, and we need to get a firm grip on the most important of them. We must discover those breakthrough reform points that enable us to “move the entire body by pulling one strand of hair”. The restraint of power through intra-party democracy is among these most important breakthrough points.

There needs to be better overall planning; put in terms of mainstream political thinking, “scientific development” is needed. This means that economic development needs to be combined with political development, social development and cultural development. There need to be upper-level designs and reasonable plans based on facts.

What is also needed is an institution responsible for co-ordinating different interests, especially at the level of the central government. Governmental reform should be matched with Party reform.

There also needs to be continuous testing and expansion of reforms, so that we “cross the river by feeling the stones”. Many reforms that have been effective have suffered from discontinuity. The problem is that when politicians leave office their policies often lapse, or are not institutionalised.

To overcome this weakness, efforts need to be made to achieve advances in areas of greater strategic importance. We speak much about supervision, but too little about restraints. We speak even less of restraints on leaders at all levels of the Party.

Everyone fears that advancing democracy will cause a loss of order and will bring social unrest. Everyone meanwhile hopes that by strengthening democracy we can maintain social stability.

However, as I see it, it is only through the deepening of reforms of our political system, and through the genuine advancement of democracy and the rule of law, that we will be able to provide for the long-lasting peaceful rule of our nation, enabling democracy to benefit the people.

Here is a rare thing. A dynamic theory from an economist — whereby the solution to today’s problem may not be the solution to tomorrow’s problem. It’s David Dollar, former World Bank country chief for China talking about the role of institutions in development…

What institutions do Asian countries need to keep growing?

31 May 2015

Author: David Dollar, Brookings Institution

The notion of a ‘middle-income trap’ has entered the lexicon of policymakers in emerging markets in Asia and elsewhere. Many leaders of countries that have experienced fast growth — such as Chinese Premier Li Keqiang — worry that economic growth will come off the boil as their countries reach middle-income status.

Growth for virtually all advanced economies was slower in the 2000s than in the 1990s; meanwhile growth rates in poor and middle-income countries accelerated. But there is a lot of variation in these broad trends, especially for the middle-income countries. Some of the latter have seen very impressive growth spurts, while others have stagnated.

What explains why some countries grow fast and others languish? There is a strong empirical relationship between the quality of institutions (as measured by the World Governance Indicators’ Rule of Law index) and economic growth. But institutional quality does not change very much from year to year or sometimes even from decade to decade, which makes it hard to explain why countries have periods of high growth followed by low growth (or vice versa).

Institutions which are well-suited to one phase of economic development may be ill-suited to another. One way to resolve the paradox of persistence of institutions and non-persistence of growth rates is to focus on the quality of institutions relative to the level of development. It turns out this can help explain why China and Vietnam, for instance, have seen such high growth in recent times: they have relatively low institutional quality in an absolute sense, but they have above-average quality institutions given their stage of development, which might, for instance, help to attract foreign investment to China or Vietnam rather than other Asian countries with similarly low wage levels but weaker institutions.

Another question is whether authoritarian institutions are better for economic growth than democratic ones. It may depend on the stage of a country’s development. When we look at the historical experience, in countries that have a per capita income below US$8,000, authoritarian institutions seem more conducive to growth. But at higher levels of income, democratic countries are likely to see higher growth than authoritarian ones. Why might this be so?

One explanation might be that at low levels of income, the economic priority of government should be to establish basic law and order and an environment in which private investment, including foreign investment, can operate. This is a catch-up stage, in which innovation is not yet particularly relevant. But the usual economic strategy for authoritarian governments relies on capital accumulation, which becomes less effective as countries get richer. When an economy reaches the point where acquiring more and more capital is no longer sufficient for rapid growth, the need for political and economic institutions that promote competition, innovation and productivity growth becomes paramount.

Interestingly, it is about at the US$8,000 per capita GDP mark that two of East Asia’s great developmental success stories, Taiwan and South Korea, were also becoming free and open polities. By the early 1980s for Taiwan and the mid-1980s for South Korea, a move had been made away from authoritarian institutions, which continued until both reached fully democratic status as measured by Freedom House’s civil liberties metric.

Of the countries that have witnessed rapid growth in Asia recently, Vietnam has shown some steps towards political liberalisation, with its civil liberties score moving to five, which is slightly better than either South Korea or Taiwan at the same stage of development. But Vietnam is entering the stage of development where the line of thinking presented above implies a need for further political reform. Greater freedom will be necessary to strengthen property rights and the rule of law in order to bring about an environment for innovation and productivity growth.

China, on the other hand, has largely eschewed political reform. Although he has placed a lot of emphasis on the idea of implementing the ‘rule of law’ in China, President Xi Jinping has made it abundantly clear that he wants to pursue economic reform without political liberalisation; some observers even point to backsliding in recent years on the question of freedom of ideas and debate. The historical evidence would suggest that this will weigh on the growth of the Chinese economy in the future. At the stage of development at which China now finds itself, South Korea and Taiwan were on the way to becoming more or less free societies.

Of course, just because no authoritarian country (apart from oil producers and, depending on how you classify it, Singapore) has reached more than 35 per cent of US GDP per capita does not mean that it will be impossible for China to do so. But the historical evidence should caution Chinese policymakers against thinking that the kind of political institutions that have facilitated China’s astonishing growth up to now will be sufficient or optimal for the next stage of its development.

David Dollar is Senior Fellow, John L. Thornton China Center, Brookings Institution. He was the former World Bank Country Director for China and Mongolia in the East Asia and Pacific Region.

China held its Central Economic Work Conference last week, chaired by president Xi Jinping, so here are a few thoughts on the current state of the Chinese economy and a few links to an article I have written, and talks I have given, recently about the Chinese economy.

First up, the slogan du jour is definitely ‘new normal’ (新常态). Xi Jinping has been using this for about six months, but now he is really using it. Xinhua’s short, official report on the conference has ‘new normal’ in the headline and ‘new normal’ six times in the text. See here for the English version.

What does it mean? It means that local politicians, state firms, and everybody else should dial back their expectations about credit and growth. The increase in both is slowing and that is the way it is going to be as China undertakes a deleveraging process in the banking and corporate sectors. There is not going to be the kind of collapse in growth that many have predicted. The government has plenty of room to fine tune the slow-down, Chinese exports remain competitive, and the global economic environment, while not great, is not a disaster from the perspective of China’s needs. Look out for reported GDP growth in 2015 between 6-7 percent.

Against this background reforms will continue to increase the extent to which the market prices credit in China’s economy. There has already been a big shift in favour of lending to the private sector since the global financial crisis (see my review of Nicholas Lardy’s new book, below), and this is one aspect of an ongoing financial liberalisation process. To my mind, this explains the recent strong performance of the Chinese stock market much better than claims it is down to an interest rate cut (which wasn’t really a cut at all given falling inflation). Previous run-ups in the Chinese market have coincided with periods of financial sector deregulation. The difference this time I suspect is that the bull market will last longer.

All in all the outlook is a not unattractive one: slower growth, better credit rationing hence higher quality growth, and a rising share for consumption in the economy at the expense of slowing investment. The main risk — as was the case during Zhu Rongji’s long period of ‘structural adjustment’ in the 1990s — is that the central government listens to local politicians who say they cannot maintain ‘social stability’ without more credit and growth. Zhu didn’t listen to such imprecations, and we have to hope Xi won’t either. As the slogan says, China needs and is getting a new normal. Otherwise the books really cannot be balanced and financial system risk will become unmanageable.

Below is a link to download the review of Nick Lardy’s latest book, Markets Over Mao, that I wrote for the latest China Economic Quarterly. The book makes an important contribution to the optimists’ case that China will overcome its current slough of non-performing loans in the banking system.

This next link is to a download of a synopsis of a talk I gave at the Madariaga College of Europe in Brussels (an EU think-tank) a couple of weeks ago. It is about how China’s development model is similar and dissimilar to those of Japan, Korea and Taiwan. The theme will be familiar to anyone who has read How Asia Works, but there are some additional, up-to-date thoughts about China as well as responses to questions raised by the Brussels nomenklatura. The precise topic I was asked to speak on is ‘What can east Asian countries learn from China’s economic policies?’

The Youtube video below is a speech I gave at the National University of Singapore in October (blog entry about that trip here) on the subject of ‘When will governance matter to China’s growth?’ (governance here meaning institutions like a free and fair and prompt judiciary). Roger Cohen of the New York Times speaks first about the role of the US in east Asia. Then I speak at roughly the 25-minute mark. Then there is a joint Q&A.

And here is another Youtube video where I spoke separately about How Asia Works at the National University of Singapore. There is quite a long Q&A in which lots of questions about development from a more Singaporean perspective are addressed.

It is worth quickly noting what a beating the KMT just got in local elections in Taiwan, winning only six of 22 contested seats for county and city heads. For the most part, people have had enough of president Ma Ying-jiu and his decidedly lacklustre leadership. This is also the first election on the island since the student protests in Taipei in March, which headed off a new services trade agreement with the mainland. The election results reflect general unease that Ma’s only economic policy is to look to Beijing for more integration and more favours. Plus the Taiwanese public has been following events in Hong Kong closely, where Beijing has breached the spirit of the Basic Law agreement on gradual democratisation. If Beijing cannot be trusted over Hong Kong, why should it be trusted over Taiwan? This seems to be an increasingly telling question when Taiwanese voters encounter a ballot box. It is particularly telling because more and more voters identify themselves as Taiwanese rather than Chinese in each successive election:

Breaking news on Sunday night suggested that Ma Ying-jiu will resign as Chairman of the KMT.

Well, HK police attacked demonstrators in Admiralty Monday morning. A wrap here from The Guardian, with video. Meanwhile, a big hoo-ha about Chinese embassy in London telling British MPs they will not be allowed into Hong Kong to investigate what is going on. Hoo-ha because it is probably illegal for Beijing to make such decisions, according to the Basic Law. But since the Hong Kong government will line up behind (or slightly in front) of whatever Beijing decrees, likely not actionable in any court of law.

And no, Ma Ying-jiu over in Taiwan has not said he is stepping down as KMT chairman. Yet. Probably no one quite so fabulous as Brave Number Nine Horse to take over the job.

Blogroll

Baseline Scenario
About the US economy, mostly. These boys are not too funny (they are economists) but they put in serious hours on this site and it is worth reading. Johnson is a Brit former IMF economist with perspective. Updated daily.

John Kay
About Britain and micro-economic issues. Research-heavy analysis rather than opinion. One of the few people with really clear ideas on bank regulation, but not yet (for me) fully thought through.

Krugman
Posts multiple times a day cos he’s manic. I was at a boring conference with him where he appeared to take frantic notes. Later transpired all he had written on his pad was ‘I need a beer’, about one hundred times. Still got Nobel.

Martin Wolf (FT sub needed)
Particularly good on Europe. During his life, Wolf has fallen in love with — and then become disillusioned by — the Labour Party, the World Bank, and perhaps now globalisation. The constant is his hunger for answers.

The Big Lychee
About Hong Kong. Affiliated with Hemlock, the exquisitely misanthropic, underemployed, billionaire’s gweilo running dog. Original Hemlock files available. Updated every day, because the author has a huge salary and nothing better to do.